With the market having enjoyed a spirited jaunt to the upside to the tune of +15% over the last four weeks and nearly +50% since the March 9th low (for the record, the S&P is up +49.36%), it is fairly obvious that the market has become overbought and just about everyone who has ever hit the buy button is looking for a pullback. Thus, the question of the day is if and when we do get a pullback that lasts more than a couple hours, is it still okay to buy or should we be looking for the exits instead?
I will admit that it is indeed very difficult to buy right now. Everything looks extended and hordes of stocks have simply exploded to the upside. And with the biggest down day over the past month having been -0.56% on the S&P 500, the opportunities to “get in” have been few and far between.
Sure, the mutual funds are clearly buying, which probably explains a lot right now. Remember, as a general rule, these guys don’t spend a lot of time picking their spots on the charts. As a mutual fund manager, when you’ve got a big slug of cash to put to work, your “spot” tends to be viewed from a weekly or monthly basis and not the15-minute chart that the fast-money crowd employs. But, can this environment where stocks only go up REALLY continue for much longer?
The answer, of course, is that Ms. Market can and will do whatever she darn well pleases and frankly, she hasn’t called to ask my opinion of late. It is also important to recognize that the market will do whatever is necessary to confound the most whenever possible. Thus, for those dyed in the wool bears out there who can only focus on how bad things are/were, it must be infuriating to see stocks simply march steadily higher for the better part of the last five months.
But to answer the question; no, stocks probably won’t continue to advance at the current pace ad infinitum. (Way to go out on a limb, eh?) It is a pretty safe bet that at some point – and likely sooner rather than later – something will come out of the woodwork that will give the bears the edge. We would guess that this piece of news will create a fair amount of distress and cause the buyers to simply stand down for a spell. Which brings us to the primary question posed this weekend: After we get a pullback, is it still okay to buy?
The Surge – Part II!
Long-time readers will undoubtedly recall our discussions of breadth surges and the long-term buy signals associated with such an event. The idea is that when the breadth of the market surges to the upside and advancing issues swamp decliners over a 10-day period, the resulting overbought condition is actually healthy and not something to be feared. As we’ve detailed in the past, history shows that such surges in breadth lead to solid advances over the next one, three, six, and twelve month periods.
So, why bring this up now? Didn’t these signals already occur? The answer is yes; we did get breadth surge buy signals in late March of this year. And in keeping with history, the market’s ensuing climb actually exceeded the average gains projected over the next three months.
But without further ado, the point is that the blast from the July low has triggered another round of breadth surge buy signals from a wide variety of indicators. And cutting to the chase, this means that the outlook for the stock market going forward definitely favors the bull camp.
For example, our old standby, the 10-day advance/decline ratio of an equity-only universe flashed a new buy signal on July 21st (the S&P closed at 954.58). History (and the computers at Ned Davis Research) show that stocks have outperformed the normal returns for the S&P 500 over the next months (+3.4% average gain after the buy signal versus the gain of +0.7% for all one-month periods), the next three months (+6.4% vs. +1.9%), the next six months (+12.2% vs. +3.9%), and the next twelve months (+17.2% on average vs. +8.2%).
While the numbers are indeed impressive, as they say, there are three kinds of lies; lies, damned lies, and statistics. So, since average returns can be misleading, we should also point out that such signals are
